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Real Estate Matters | What is rent control and does it work?

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Friday, October 19, 2018 - 2 months ago No Comments 1,895 Views

Sam Lee

Sam Lee is a marketing manager and property consultant at JML Property.JML was established in 1994 and offers Investment Property & Homes. It specializes in managing properties for owners and investors, and providing attractive and comfortable homes for tenants.

In Macau, we often hear stories of landlords raising rents to incredulous heights and forcing existing tenants to move at the end of the tenancy agreement. Some say that it’s just the market doing what the market does and that we should just deal with it, while others say that the government should intervene to protect the tenants. The latter is often voiced much louder, and with the recent introduction of the 3-year tenancy contracts, it looks like the government has been listening.

An idea that is sometimes suggested is the introduction of ‘rent control’, where the maximum rent a landlord can set in a specified area is capped or controlled by the law to protect tenants from being priced out. Rent control is actively practiced in places like New York and California, but not without controversy from both sides. The question remains: Does it work?

At the risk of oversimplifying the issue, the argument against rent control says that the policy ends up hurting the very tenants it seeks to protect by reducing the supply and quality of rental properties. Firstly, the lower rents potentially mean the additional costs and inconveniences of having tenants outweighs the benefits and stops the landlord from putting the property on the market in the first place. Even if the landlord does rent the property, he would not be motivated to maintain the property to the standard of the market rate X, and would likely allow the property degenerate to match the lower rent rate of Y.

One way to address this would be to place a tax on vacant apartments as Hong Kong recently did, but as you can see this would lead us down a policy rabbit hole where one is plastered over the next.

Another way that rent control could limit housing supply is by disincentivising property developers from building new stock. A common practice for developers is to presell the newly developed residential stock and keep the commercial spaces to rent out. If rental prices are capped, this strategy becomes less attractive and sales more difficult.

The arguments from the other side are both moral and economic. The obvious moral argument is that it is unfair to suddenly hike the rent and force the tenant out given that housing is a basic human need, especially if the tenant is in a disadvantaged economic or demographic position. The economic argument is that by allowing rents to soar without limits, certain types of business activities become unviable due to prohibitive commercial rents and this takes away from the entrepreneurial stock of the city.

There is no one-size-fits-all answer to this question, and each market will need to find its own balance between laissez-faire economics and interventionism. Other common alternative or supplements to rent control are the provision of public housing, housing vouchers or subsidies.